Question

The LIFO method of valuing inventory in an environment of rising prices and costs, generally results in the following :

		Leads to a lower amount of corporate income tax being paid
		All of the above
		Leads to a Balance Sheet that understates the market value of the inventory that remains
		An assumption that more recently acquired inventory is used for current production - leading to higher COGS and lower accounting profits

A company finds that its forecasts, using an (alpha) α of 0.20, are becoming increasingly inaccurate (error is increasing). What should they best do, given the options below?

(Error = Actual demand minus forecast)

	a.	consult the ‘predict your future for $5’ shop across the street
	b.	increase value of alpha
	c.	decrease value of alpha
	d.	stay with the same alpha

Kim K. asks you to develop a demand forecast for her perfume line. Using the data provided, you find a regression model, y = 4 + 3.36x₁ + 5x₂, with the undernoted parameters. Kim asks you the question below – please answer her.

Parameters:         R²= 0.88

Sig of F: 0.04

p-value of x₁= 0.05

p-value of x₂= 0.04

x₁ denotes Consumer Income

x₂ denotes Advertising

y denotes Demand

Would a unit increase in Consumer Income (x₁₎ result in an increase of 3.36 units in Demand (y), on average?

	a.	Yes, because for a 3.36 units increase in y, x1 increases by 1 unit
	b.	Φ=μα
	c.	No, because for a unit increase in y, x1 increases by 3.36 units
	d.	Yes, because for a unit increase in x1, y increases by 3.36 units on average, provided x2 kept constant

Answer 1

Solution:

1: An assumption that more recently acquired inventory is used for current production - leading to higher COGS and lower accounting profits
The most recent inevtory is taken into account and hence the cost of the produced goods go up because of LIFO.

2: Increase the value of alpha
With an increase in the value of alpha the smoothed series is very much closer to the original series and hence the errors will be reduced.

3: Option d
Yes, because for a unit increase in x₁, y increases by 3.36 units on average, provided x₂ kept constant